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marginal costing
Page 1
JOIN KHALID AZIZ
ACCOUNTING(FINANACIAL & COST) OF
ICMAP STAGE 1,2,3,4 (NEW CLASSES)
CA..MODULE B,C,D
PIPFA (FOUNDATION,INTERMEDIATE,FINAL)
ACCA-F1,F2,F3
BBA,MBA
B.COM(FRESH),M.COM
MA-ECONOMICS..O/A LEVELS
KHALID AZIZ…..0322-3385752
Page 2
Why do we study Marginal Costing?
Page 3
What do we study in Marginal Costing?
Marginal Cost
Marginal Costing
Direct Costing
Absorption Costing
Contribution
Profit Volume Analysis
Limiting Factor/key factor
Break Even Analysis
Profit Volume Chart
Page 4
What do we study in Marginal Costing?
and
Why do we Study MC?
Marginal Cost
Marginal Costing
Direct Costing
Absorption Costing Management
Contribution Decision
Profit Volume Analysis Making
Limiting Factor/key factor
Break Even Analysis
Profit Volume Chart
Page 5
Marginal Cost
“Marginal cost is amount at any given
volume of out put by which aggregate
costs are changed…..
if volume of output
is increased or decreased by one unit”
Page 6
Marginal Cost
“Marginal cost is amount at any given 1
volume of out put by which aggregate
costs are changed if volume of output
is increased or decreased by one unit” Marginal Cost 100 x150= 15000
Fixed Cost = 5000
total 20000
2
1 Manufacture 100 radio
Variable costs Rs150 p u
Fixed cost Rs 5000 Marginal cost 150 x101=15150
2 If Manufacture 101 radios Fixed Cost = 5000
TOTAL 20150
additional Cost=Rs 150
Page 7
Marginal Costing
“marginal costing is ascertainment of
marginal cost by differentiating between
fixed and variable costs
and of the effect
of changes in volume or type of output”
Page 8
Marginal Costing
What Could be effects of
Changes
In volume
or
Type of output
Page 9
Marginal Costing
What Could be effects of
Changes
1 lakh units
In volume To
2 lakh units
or
Type of output
Page 10
Marginal Costing
From One
What Could be effects of Model of
Car to
Changes
Another
In volume
or From One
Type of output Size of
product to
another
Page 11
Marginal Costing ---Characteristics
Fixed & Variable Inventory
Costs Valuation
Marginal Costing
MC Costs as
Contribution &
Products Costs
Profit
Fixed Costs as
Pricing
Period Costs
Page 12
Marginal Costing ---Characteristics
Semi-variable costs
Segregation are segregated
Fixed & Variable into fixed &
Costs variable
Page 13
Marginal Costing ---Characteristics
Only Variable costs
Marginal Costs are charged
as to products
Products Costs
Page 14
Marginal Costing ---Characteristics
Fixed costs treated
Period costs
Fixed Costs as Charged to costing
Period Costs P & L Account
Page 15
Marginal Costing ---Characteristics
WIP & F goods are
Valued at
Inventory Marginal Cost
Valuation
Page 16
Marginal Costing ---Characteristics
S-V=C
Contribution
Profitability judged on
Contribution made
Page 17
Marginal Costing ---Characteristics
Pricing is based on
Contribution &
Pricing Marginal Costs
Page 18
Marginal Costing ---Characteristics
A B C Total
Sales - - - ----
Less VC - - - ----
Contribution - - - ----
Marginal Costing
&
Fixed Cost ----
Profit
Profit -----
Page 19
Marginal Costing --- Marginal Costing Profit
Sales of A Sales of B Sales of C
less less less
Marginal cost Marginal cost Marginal cost
Of A Of B Of C
= = =
Contribution of Contribution of Contribution of
A B C
Total
Contribution of
A,B& C
less
Total Fixed = Profit/loss
Cost
Page 20
Absorption Costing
“Absorption cost is a total cost technique
Under which total cost i.e. fixed & variable
is charged to production.
Inventory is also valued at total cost.
Page 21
Absorption-Marginal Costing--differences
Measurement
Valuation Of
Profitability
Fixed & Of stock
Variable
Costs
Page 22
Absorption-Marginal Costing--differences
Marginal Costing Absorption Costing
Fixed & Only variable cost Both F & V Costs
Variable Are charged
FC charged to P/L
Costs
Page 23
Absorption-Marginal Costing--differences
Valuation
Of stock
WIP & FS
at
Marginal
Total Cost
Cost
Page 24
Absorption-Marginal Costing--differences
Measurement
Of
Profitability
C=S-V P=S-V-F
Page 25
Comparative Cost Statement
Marginal Costing Absorption Costing
Months Months
1 2 3 Total 1 2 3 Total
Rs Rs Rs Rs Rs Rs Rs Rs
(A) Sales 2,00,000 1,65,000 2,35,000 6,00,000 2,00,000 1,65,000 2,35,000
6,00,000
Opening Stock 84,000 84,000 1,05,000 2,73,000 1,08,000 1,08,500 1,35,625 3,52,625
Add V Cost 1,20,000 1,20,000 1,20,000 3,60,000 1,20,000 1,20,000 120,000 3,60,000
F Cost _ _ _ _ 35,000 35,000 35,000 1,05,000
Total Cost 2,04,000 2,04,000 2,25,000 6,33,000 2,63,000 2,63,000 2,90,625 8,17,625
Less C Stock 84,000 1,05,000 84,000 2,73,000 1,08,000 1,35,625 1,08,500 3,52,625
(B) COGS 1,20,000 99,000 1,41,000 3,60,000 1,55,000 1,27,875 1,82,125 4,65,000
Contribution (A-B)c 80,000 66,000 94,000 2,40,000 _ _ _ _
( D) F Cost 35000 35,000 35,000 1,05,000 _ _ _ _
Profit (C-D) 45,000 31,000 59,000 1,35,000
(A-B)
45,000 37,125 Page 26
52,875 1,35000
Comparative Cost Statement
Marginal Costing Absorption Costing
Months Months
1 2 3 Total 1 2 3 Total
Rs Rs Rs Rs Rs Rs Rs Rs
(A)Sales 2,00,000 1,65,000 2,35,000 6,00,000 2,00,000 1,65,000 2,35,000 6,00,000
Opening Stock 84,000 84,000 1,05,000 2,73,000 1,08,000 1,08,500 1,35,625 3,52,625
Add V Cost 1,20,000 1,20,000 1,20,000 3,60,000 1,20,000 1,20,000 120,000 3,60,000
F Cost _ _ _ _ 35,000 35,000 35,000 1,05,000
Total Cost 2,04,000 2,04,000 2,25,000 6,33,000 2,63,000 2,63,000 2,90,625 8,17,625
Less C Stock 84,000 1,05,000 84,000 2,73,000 1,08,000 1,35,625 1,08,500 3,52,625
(B) COGS 1,20,000 99,000 1,41,000 3,60,000 1,55,000 1,27,875 1,82,125 4,65,000
Contribution (A-B)c 80,000 66,000 94,000 2,40,000 _ _ _ _
( D) F Cost 35000 35,000 35,000 1,05,000 _ _ _ _
Profit (C-D) 45,000 31,000 59,000 1,35,000
(A-B)
45,000 37,125 Page 27
52,875 1,35000
Comparative Cost Statement
Marginal Costing Absorption Costing
Months Months
1 2 3 Total 1 2 3 Total
Rs Rs Rs Rs Rs Rs Rs Rs
(A)Sales 2,00,000 1,65,000 2,35,000 6,00,000 2,00,000 1,65,000 2,35,000 6,00,000
Opening Stock 84,000 84,000 1,05,000 2,73,000 1,08,000 1,08,500 1,35,625 3,52,625
Add V Cost 1,20,000 1,20,000 1,20,000 3,60,000 1,20,000 1,20,000 120,000 3,60,000
F Cost _ _ _ _ 35,000 35,000 35,000 1,05,000
Total Cost 2,04,000 2,04,000 2,25,000 6,33,000 2,63,000 2,63,000 2,90,625 8,17,625
Less C Stock 84,000 1,05,000 84,000 2,73,000 1,08,000 1,35,625 1,08,500 3,52,625
(B) COGS 1,20,000 99,000 1,41,000 3,60,000 1,55,000 1,27,875 1,82,125 4,65,000
Contribution (A-B)c 80,000 66,000 94,000 2,40,000 _ _ _ _
( D) F Cost 35000 35,000 35,000 1,05,000 _ _ _ _
Profit (C-D) 45,000 31,000 59,000 1,35,000
(A-B)
45,000 37,125 Page 28
52,875 1,35000
Concept Of Contribution
Page 29
Contribution is the difference between sales
And the marginal (Variable) cost
Contribution =sales-variable cost
C= S-V
Contribution = Fixed Cost+ Profit
C= F+P
Therefore
S-V = F+P
Page 30
Contribution is the difference between sales
And the marginal (Variable) cost
S-V=F+P
If any 3 factors in the equation are known
The 4th could be found out
P=S-V-F
P=C-F
F=C-P
S=F+P+V
V=S-C……….
Page 31
PROFIT ? SALES?
C=S-V
Sales =Rs 12,000
=12,000-7000=5000 S=C+V
V Cost=RS 7,000 P=C-F
=5,000+7,000
F Cost=Rs 4,000 =5,000-4000 =Rs 12,000
=Rs 1,000
Page 32
F COST? V Cost?
Sales =Rs 12,000 F=C-P V=S-C
V Cost=RS 7,000
=5,000-1,000 =12,000-5000
F Cost=Rs 4,000 =Rs 7,000
=Rs 4,000
Page 33
Profit –Volume Ratio (PV Ratio)
(Expresses the relation of Contribution to sales)
Sales= Rs 10,000
V Cost=Rs 8,000
P/V Ratio =Contribution = C/S =S-V/S
Sales
C = S XP/V Ratio
P/V Ratio=c/s
C
=S-V/S
S = --------
=10,000-8000/10,000
P/V Ratio
=20%
Page 34
Profit –Volume Ratio (PV Ratio)
When PV
Ratio is
Given
C= SXPV Ratio
C= 10000X20%
=Rs 20,000
Page 35
Profit –Volume Ratio (PV Ratio)
Change in Contribution
P/V Ratio = --------------------------------- Another Method
Change in Sales
Change in profit
= -----------------------
Change in Sales
Year sales net profit
2005 20,000 1000
1600-1000
=-------------------x 100
2006 22,000 1600
22000-20000
600
= -----------x100=30%
2,0000
Page 36
What Could be the Uses of PV Ratio?
Break Even Point
Profit at Given Sales
Vol required to earn given Profit
Page 37
How Improvement in PV Ratio Could be Achieved?
Increasing Selling Price
Reducing Variable Cost
Changing Sales Mix
Page 38
Limiting Or Key Factor
a factor in short supply
Page 39
Limiting Or Key Factor
a factor in the activities of an undertaking
which at a point of time or over a period
will limit the volume of out put
Page 40
Limiting Or Key Factor
What Could be the Limiting Factors ?
Labour
Materials
Power
Sales
Capacity
Machines
………….
Page 41
Cost- Volume- Profit Analysis
Page 42
Cost- Volume- Profit Analysis
Cost Of Production
Selling Prices
Volume Produced /Sold
Page 43
Cost- Volume- Profit Analysis
Break Even Analysis
Profit Volume Chart
Page 44
Cost- Volume- Profit Analysis
Break Even Analysis
A point of no profit no loss
A point where revenue equals cost
Page 45
What are BEP---assumptions
All costs are fixed or variable
VC remains Constant
Total FC remains Constant
Selling Price don’t change With Volume
Synchronisation of Prod & Sales
No Change in Productivity per workers
Page 46
Cost- Volume- Profit Analysis
Break Even Analysis
Methods
Algebraic Method
Graphic Method
Page 47
Cost- Volume- Profit Analysis
ALGEBRAIC
Fixed Cost METHOD
BEP (Units) = --------------- = F
Contribution PU S-V
Fixed Cost
BEP (Rs ) = ----------------- x Sales
Contribution
Fixed Cost
BEP (Rs) = ------------------
P/V Ratio
Page 48
Cost- Volume- Profit Analysis
ALGEBRAIC
Fixed Cost METHOD
BEP (Units) = --------------- = F
Contribution PU S-V
Fixed Cost
BEP (Rs ) = ----------------- x Sales
Contribution
F Cost=Rs 12000
Fixed Cost S Price=Rs12 pu
BEP (Rs) = ------------------ V Cost =Rs 9 pu
P/V Ratio
Find BEP
Page 49
Cost- Volume- Profit Analysis
F Cost=Rs 12000
Other Uses S Price=Rs12 pu
V Cost =Rs 9 pu
Profit when sales are
Profit at diff. Sales Vol. a) Rs 60,000
b) Rs 1,00,000
Sales at Desired Profit
Page 50
Cost- Volume- Profit Analysis
F Cost=Rs 12000
S Price=Rs12 pu
Profit at diff. Sales Vol. V Cost =Rs 9 pu
Profit when sales are
C
P/V Ratio= ----- = 3/12=25% a) Rs 60,000
S b) Rs 1,00,000
WHEN SALES=Rs 60,000
contribution=salesxp/vratio
=60000x25%
=Rs 15000
Profit =contribution-fixed cost
=15000-12000
=Rs3000
Page 51
Cost- Volume- Profit Analysis
Other Uses F Cost=Rs 12000
S Price=Rs12 pu
V Cost =Rs 9 pu
Sales at Desired Profit Sales if desired profit
a) Rs 6000
b) Rs 15,000
F Cost +Desired Profit
Sales= -------------------------------
P/V Ratio
Page 52
Cost- Volume- Profit Analysis
Sales at Desired Profit F Cost=Rs 12000
S Price=Rs12 pu
V Cost =Rs 9 pu
F Cost +Desired Profit
Sales= ------------------------------- Sales if desired profit
P/V Ratio a) Rs 6000
b) Rs 15,000
12,000+6000
a)Sales= ---------------
25%
=Rs 72,000
Page 53
CVP Analysis -question
P ltd has earned a profit of Rs 1.80 lakh on sales of
Rs 30 lakhs and V Cost of Rs 21 lakhs.
work out
a)BEP
b)BEP When V Cost decreases by5%
c)BEP at present level when selling price reduced by5%
Page 54
CVP Analysis -
S-V
P/V Ratio=--------
S
3000000-2100000
= ------------------------
3000000
=30%
Sales =VC+FC+P
3000000=2100000+FC+180000
FC =Rs 720000
7,20,000
BEP= -------------
30%
=Rs 2400000
Page 55
CVP Analysis -question
b) When V Cost increases by 5%
New Variable Cost=2100000+5%
=22,05,000
PV Ratio 3000000-2205000
3000000
=26.5%
BEP =7,20,000/ 26.5%
=Rs 27,16,981
Page 56
CVP Analysis -question
c)When Selling Price reduced by 5%
New SP=3000000—5%
=Rs 28,50,000
Contribution=28,50,000-21,00,000
=Rs7,50,000
PV Ratio =7500000/2850000
=26.32%
FC+PROFIT
Desired Sales= ------------------ = 720000+1800000
PV Ratio 26.32%
=Rs 34,19,453( appx)
Page 57
BEP
Graphical Presentation
Page 58
Break-Even Analysis
Costs/Revenue
Initially a firm
will incur fixed
costs, these do
not depend on
output or sales.
FC
Q1 Output/Sales
Page 59
Break-Even Analysis
Total revenue point
The Break-even is
As lower
occursoutputais the
The where by firm
Initially total
The total costs the
determined the
Costs/Revenue TR
generated,
will incur less
price,equals and
thereforethe fixed
revenuecharged total
TR TC price will incur
firm the firm,do
VC the – the sold
costs,
steep these –
(assumingcosts in
costs quantitytotal–
variable would
this not depend on
example
again this curve.
accurate will be
revenue Q1 to
thesesell sales.
have to vary by
output or
determined the
forecasts!) is the
directly with
generate sufficient
expected produced
amount forecast
sum of FC+VCits
revenue to cover
sales initially.
costs.
FC
Q1 Output/Sales
Page 60
Break-Even Analysis
Costs/Revenue If the firm chose
TR TR TC to set price higher
VC than Rs2 (say
Rs3) the TR curve
would be steeper –
they would not
have to sell as
many units to
break even
FC
Q2 Q1 Output/Sales
Page 61
Break-Even Analysis
TR)
Costs/Revenue If the firm chose
TR
TC to set prices lower
VC it would need to
sell more units
before covering its
costs
FC
Q1 Q3 Output/Sales
Page 62
Break-Even Analysis
TR
Costs/Revenue TC
Profit VC
Loss
FC
Q1 Output/Sales
Page 63
Break-Even Analysis
Margin of
TR TR
TC safety shows
Costs/Revenue A far sales
how higher price
VC would lower
can fall before
Assume If
losses made.
the break
current and
Q1 = 1000sales
even point
Q2 = 1800, sales
at Q2
and the
could fall by 800
margin a
units beforeof
loss would be
safety would
made
widen
Margin of Safety
FC
Q3 Q1 Q2 Output/Sales
Page 64
High initial FC.
Interest on debt
rises each year – FC
Costs/Revenue rise therefore
FC 1
FC
Losses get
bigger!
TR
VC
Output/Sales
Page 65
Break-Even Analysis
• Remember:
• A higher price or lower price does not
mean that break even will never be
reached!
• The BE point depends on the sales
needed to generate revenue to cover
costs
Page 66
Break-Even Analysis
• Importance of Price Elasticity of Demand:
• Higher prices might mean fewer sales to break-
even
• Lower prices might encourage more customers
but higher volume needed before sufficient
revenue generated to break-even
Page 67
Break-Even Analysis
• Links of BE to pricing strategies and
elasticity
• Penetration pricing – ‘high’ volume, ‘low’ price –
more sales to break even
Page 68
Break-Even Analysis
• Links of BE to pricing strategies and
elasticity
• Market Skimming – ‘high’ price ‘low’ volumes –
fewer sales to break even
Page 69
Break-Even Analysis
• Links of BE to pricing strategies and
elasticity
• Elasticity – what is likely to happen to sales
when prices are increased or decreased?
Page 70
Marginal Costing
Cost Volume Chart
Page 71
Construction Of PV Chart
1 select a scale on Horizontal axis---sales
2 Select a scale on Vertical axis- FC & Profit
3 Plot FC & Profit
4 Diagonal line crosses sales line at BEP
Page 72
PV Chart Information
Fixed Cost =Rs 5000
Sales =Rs 20000(pu RS 20)
V Cost= Rs 10000(pu Rs10)
Find
PV Ratio, BEP, Profit?
Page 73
Construction Of PV Chart
8000
6000
BEP 5000
4000
2000
Fixed Cost
Rs
Profit
0 5000 10000 15000 20000 Rs
Sales Rs
2000
4000
5000
6000
8000
Page 74
Construction Of PV Chart
8000
6000
BEP 5000
4000
2000
Profit
Fixed Cost
Area Profit
Rs
0 5000 10000 15000 20000 Rs
Sales Rs
Loss
2000
Area
4000 Margin of Safety
5000
6000
--------------------------
8000
Page 75
Effect Of Change in Profit- 20% decrease in fixed Cost
New F Cost= 5000- 20%=Rs4000
Fixed Cost
New BEP = PV Ratio
= 4000/50%
=Rs 8000
New Profit=S-F-V
=20000-4000-10000
=Rs 6000
Page 76
Effect of Change in profit- 20% decrease in FC
8000
6000
BEP 5000
4000
2000
Profit
Fixed Cost
Area Profit
Rs
0 5000 10000 15000 20000 Rs
Sales Rs
Loss
2000
Area
4000
5000
6000
8000
Page 77
Effect Of Change in Profit- 10% decrease in V Cost
New V Cost= 10000- 10%=Rs9000
New PV Ratio=20000-9000 =55%
20000
Fixed Cost
New BEP = PV Ratio
= 5000/55%
=Rs 9090 Appx
New Profit=S-F-V
=20000-5000-9000
=Rs 6000
Page 78
Construction Of PV Chart
8000
6000
New BEP
5000
4000
2000
Profit
Fixed Cost
Area Profit
Rs
0 5000 10000 15000 20000 Rs
Sales Rs
Loss
2000
Area
4000
5000
6000
8000
Page 79
Effect Of 5% Decrease in Selling Price
8000
6000
5000
4000
2000
Profit
Fixed Cost
Area Profit
Rs
0 5000 10000 15000 20000 Rs
Sales Rs
Loss
2000
Area
4000
5000
6000
8000
Page 80
ATTENTION COMMERCE
STUDENTS
ACCOUNTING(FINANACIAL & COST) OF
ICMAP STAGE 1,2,3,4 (NEW CLASSES)
CA..MODULE B,C,D
PIPFA (FOUNDATION,INTERMEDIATE,FINAL)
ACCA-F1,F2,F3
BBA,MBA
B.COM(FRESH),M.COM
MA-ECONOMICS..O/A LEVELS
KHALID AZIZ…..0322-3385752
Page 81
